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Tuesday, August 17, 2004

Economic Forecasting: The Future of the American Job Market

What is the future of the American job market going to look like? Many people have asked me this. In my new series of writing, I've been focusing on now just analyzing the past but attempting to forecast the future. A friend of mine, a nuclear physicist, once joked to me that all economics was composed of was straight lines. My reply after having worked as a consultant and analyst in the business world briefly was that trying to get an executive to understand the divergence or convergence of straight lines was in itself a herculean task.

Today I'm going to talk about two straight lines. Put together they will tell the story. Not the whole story. But enough to give everyone here the big picture of what is going to happen irregardless of the policy details or whoever get's elected this upcoming election cycle.

Of course looking into the future opens me up to the Keynesian maxim that in the long run we're all dead. However my response is that the "long term" consequences I'm talking about are being felt today and will increase markedly over the next five or ten years. This is something that neo-Keynesians have failed to understand, right or left, that there is a difference between a long term result and a long term trend. You can start feeling pinched by the trend long before you ever get to the eventual long term result of that trend.

Most of the people reading this blog will live long enough to feel significantly squeezed by this movement if they manage to make it another year or two, and that's reason enough to be concerned.

What this report says clearly is that the Fed is locked in a policy bind: it wants to tighten to prevent inflation, but the US economy is fundamentally weak, and it needs to losen to keep it going. Since fiscal policy has been taken off the table - Bush has spent all the money - that means that Greenspan will have to take one of the two. Unlike 1998, where there was a policy bind and one option, risking asset inflation, was both more distant and probably more tame than the other - allowing a financial crisis to cause an immediate crash in equities and the global financial infrastructure - Greenspan's choice was easy, and to ease. Now the problems are both of equal time frame, and it is not clear which one is the more dangerous risk.

By "this report" Stirling is talking about a report by Angry Bear blog author Kash. His blog subtitle is "Slightly left of center comments on news, politics, and economics from an economist." which explains neatly where he's coming from. I've noticed the last few years that left-of-center and liberal economists such as Kash and Brad Delong mix one part good data analysis with two parts bad "free trade" theory and modestly incompetent fiscal theory (as opposed to grossly incompetent fiscal practice from Bushite economists).

Here below is what I'm referring to, the great liberal economist myth that if Bush had been replaced by a Rubin-esque Democrat the economy would be better off today.

What can be done about it? At this point, unfortunately, it's a bit late for the most effective economic medicine: an appropriate fiscal stimulus in 2002 or early 2003. The Bush administration squandered their fiscal ammunition on a tax cut for the wealthy that did little for the economy other than to cause a temporary spike in retail sales last summer.

Another fiscal stimulus at this point would have to be very carefully designed to be effective. It would have to be explicitly temporary, to avoid spooking the bond market and driving interest rates higher. The tax cuts would have to be directed toward the middle class, and spending increases would probably be most effective if the federal government distributes the money to state and local governments to spend.

Kash starts out by making an absolutely correct analysis of the data to conclude that we're having a pullback right now in the overall economy. He then goes on to imply that if a person where in charge implementing liberal economic policies then the economy would be better off. Well he's half right.

Certainly the fiscal picture would look better, without us hemmoraging debt. We wouldn't have gotten into a mess in Iraq and taken the world down a road of oil insecurity so oil prices would be lower. The better designed fiscal stimulus would mean that the economy would have been in a better position and there would be more jobs.

So what's not to like? Why is this a half-truth or a great liberal economist myth? It's that long term trend stuff that apparently economists, liberal or conservative in modern circles fail to understand. What GWB did was simply precipitate something that would have happened five, ten, or at most fifteen years down the road. And it would have been sooner or later. The reason why we can tell this is because Clintonian and as far as we can determine Gorean economic policy would have still supported the unsustainable trends of capital flight, intellectual property-equity conversion asset stripping, and the destruction of capital investment and job growth in the United States.

Indeed the process accellerated under the Clintonian regime and if anything GWB has while forwarding in time the eventual consequences has taken protectionist actions which while they don't improve the circumstances don't worsen it either. In other words the liberal economic regime that Rubin's and Reich's disciples dream of in economic circles, would have delayed the inevitable but would have made it worse when it came to its end.

Many people have pointed out that the US hasn't lost jobs to outsourcing - that's only true in a technical sense. What has happened is that the new jobs have been mostly created overseas (in cases where they can be done overseas). Old jobs haven't (mostly) been moved because of sunk capital costs. Once you've paid 10 million dollars to create a factory, spending another 10 million dollars to relocate the factory usually doesn't make sense. But if you have to build a new factory anyway (either because you need more capacity or because the old factory would have to be replaced for some reason) then it makes sense to build it in the domicile with the higher surplus production. That's exactly what we've seen over the last few years: China and India getting the new jobs in non protected sectors. It's not rocket science, it's just ROI (Return on Investment).

Here Ian encapsulates something the oldman has been commenting upon for some time. It's not so much that offshoring is a matter of job-loss, it's a matter of Ricardo's Iron Law of Wages combined with capital flight. We're not losing jobs. We're losing job growth. That's why we're still not even with the number of jobs we had at the end of the nineties in absolute terms.

The American economy is no longer successfully creating jobs, just destroying them in its usual churn pattern. Since the cycle has been unbalanced, and this is something that economists left and right seem befuddled about and unable to grasp, this explains why job creation and wage growth have been so anemic. This is why you can get so contradictory a set of indicators such as factory output rising while at the same time the trade deficit widens.

Over two decades, the income gap has steadily increased between the richest Americans, who own homes and stocks and got big tax breaks, and those at the middle and bottom of the pay scale, whose paychecks buy less.

The growing disparity is even more pronounced in this recovering economy. Wages are stagnant and the middle class is shouldering a larger tax burden. Prices for health care, housing, tuition, gas and food have soared.

The wealthiest 20 percent of households in 1973 accounted for 44 percent of total U.S. income, according to the Census Bureau. Their share jumped to 50 percent in 2002, while everyone else's fell. For the bottom fifth, the share dropped from 4.2 percent to 3.5 percent.

Of course liberal economists have noticed the trend of income equality and attacked government fiscal and taxation and subsidy policies as engendering it. However what they have failed to grasp is that their own trade policies and regulatory monetary and equity policies have been equally responsible for causing this trend. This trend has been going on for over twenty years through Presidents and Congresses both liberal and conservative. It is not a question of social justice, but simply capitalistic return on investment and wealth creation. The trend is not wrong because it is immoral, it is wrong because it makes America as a whole poorer. The income equality trend is just a symptom of the underlying economic restructuring trend, and because of their leftist social justice ideology the liberal economists have completely missed out on the story as a whole.

GWB is simply through his blundering actions ripping down the curtain to reveal for all to see what had been going on for a long time. So that's all the past however. What about the future? Well let's think of two simple lines.

Suppose and this is a very crude assumption that the amount of true innovative capital stays inflation adjusted constant in the United States and that the number of jobs this creates keeps up enough so that the total number of jobs in the USA stays roughly constant. This is a flat line. The absolute number of jobs stays the same. It does not assume increased job losses due to automation, etc.

Many of the world’s largest industrialized nations will lose population between now and 2050 as low birth rates, struggling economies and curbs on immigration stifle growth, says the author of a world population report.

The annual study by the private Population Reference Bureau found that, while the world’s population will increase nearly 50 percent by mid-century, Japan will lose 20 percent of its population in the next 45 years, while Russia, Germany and Italy will also see declines.

The United States is the biggest exception among developed countries, with its population forecast to rise by 43 percent from 293 million now to 420 million at mid-century.[emphasis added]

So the second line is a rising line, the population line. Now imagine a ratio. In the numerator on top you have the number of jobs and it is constant. On the bottom you have the number of people seeking jobs, and it gets bigger by 43%. What that means is that the ratio of jobs to inhabitants will drop to 0.699 or 70% of what it is now in fifty years. That's a decrease of 30%. As a matter of fact this process has been ongoing, and has been going on in a very obvous way since the beginning of the new century and millenium.

So we're feeling it already. This is something we feel today and not something to be put off for tomorrow. We're already getting pinched by this and some would say punched. It's just that it will get worse and not better in the long term.

This doesn't mean that nothing can be done, but the great promise of the leftist economists is that Kerry will be elected and restore Rubin-style economic and fiscal policies. This will help for a while. A very short while. But the truth will simply play out a decade later than under the GWB the blunderer who will ram home the consequences today. And it won't be much more than a decade that a Rubin-dynasty restoration would achieve. This is because the land is shifting underneath the feet of the economists even as they clamor for nostalgia.

Still, most of the world’s population growth will come in developing nations, even though these less developed countries generally have much higher rates of HIV and AIDS infections and infant mortality.

China, currently the world’s most populous nation at 1.3 billion, would see an overall 10 percent increase between now and 2050 to over 1.4 billion in 2050, but its peak population is anticipated to be reached by 2025 with declines thereafter.

India expected to top ChinaBy 2050, India is expected to overtake China, rising almost 50 percent from under 1.1 billion now to 1.6 billion at mid-century. Nigeria’s population is expected to nearly triple in size to 307 million, while Bangladesh would double to 280 million.

Not only are these countries industrializing and therefore the proportion of their population that is consuming more energy increasing, but the absolute size of their populations is increasing. That is another line. What do you get when you get growth on top of growth? It's the definition of exponential growth. The energy usage of India and China will grow exponentially because they are both industrializing and increasing the absolute size of their economies at the same time.

The interesting thing about exponential curves is that they start out very slow and only pick up steam later. The scary thing is that we're still in the flatish gradually scooped out upcurving portion of the exponential growth curve. Later on it will sky rocket and shoot up to approach some vertical line before leveling off. But there are tiny shifts in the tangential curvature of that line which while unperceptible to the individual the market is picking up. That is why the long range price of energy in oil and natural gas is increasing even with expectations of increased supply and infrastructure development.

It's not just bottlenecks created by feast-famine and boom-bust cycles. These variations are on top of a gradual long term trend that we are feeling now even though the long term result - and by long term I mean just a decade or two at most - is not quite yet apparent to the masses. This creates a new terrain that will mean that the same Rubin policies that worked in the nineties when oil was cheap and hit about $10 (light sweet crude) lsc pb will be stagnant or disasterous in the long term when worked in the new millenium when the baseline price of oil is creeping up to $40 lsc pb and the spot price is not likely to fall much below that without rebounding.

This introduces a third line, a line of exponential growth of energy consumption from the sector of developing nations. These three lines, the flat job number line with the increasing American population line along against the backdrop of the rising exponential energy consumption of the third world tell the story. It can happen sooner or it can happen later, but Democrats shouldn't fool themselves into thinking that any sort of implementation of the policies of the past can do anything other than delay the day of reckoning for a few years.

This is the future that America faces if nothing done is different from the past - and by the past I mean the last twenty five years including the end of the Carter era and the entire Clintonian era - less jobs to go around for more people, higher energy costs as well as scarcity and demand, supplied with unsustainable governmental taxation and fiscal policies. If the Republicans get into power it will be unsustainable fiscal policies that do us in sooner, and if the Democrats get into power it will be unsustainable taxation policies that do us in later. Then things will really get bad, because all of this is just the first stage of the economic restructuring in anticipation of the resource rush or scramble for later. That's just what will happen before the oil really does start running out, the infamous Hubbert's peak. Then the real dog eat dog will happen.

But that's for our children and grandchildren to deal with. What we have today will be bad enough. We simple naive people are suspicious about being sent out to die for oil. Our children and grandchildren will line up to do so because the local short term alternatives available to them will be worse. At least dying for oil is quick as compared to mass starvation and homelessness in systemic economic cannibalization.

With likely out and out wars for oil and natural gas on the way, this will only add to the overall misery. The current economy is already a war economy, and the last durable goods report would have been negative without military airplane category expenditures. That's a war economy. America is already at war, and she just don't know it yet. You follow the money, because that's where people stop bs'ing and start spending cash.

I'm not saying that a Democratic President or Congress would be no better than GWB. With GWB we face the possibility of outright self-fullfilling nuclear armageddon and a war of civilizations. With the standard style of Democratic governance though things will still be bad: a sort of Vietnam war, seventies' stagflation, and Great Depression all rolled into one. This is why I've suggested to people repeatedly to read "The Grapes of Wrath". The sad thing is that is the better case scenario than what Bush offers, but it's only a lesser evil and not a greater good. This is the real reason why liberal activists can't get too excited about the Kerry-Edwards ticket despite Kerry trudging his way cautiously to a winning electoral poll positioning. At some level, at some subconscious level, they sense that they're supporting the lesser evil rather than the greater good.

Can anything be done? Yes. But it would resemble nothing like either past Republican OR Democratic policies of governance. Anyone imagining that the election of Democrats over Republicans to implement burned out but less politically risky rehashed policies of the past is anything other than choosing "dumb" over "dumber" is fooling themselves. And that's where the majority of liberal economists now sit, they've talked themselves that choosing "dumb" over "dumber" is the smart choice.

The smart choice would be to make the smart choice, but they haven't gotten to that point yet because they're still captive in their imagination to the past. Get over it people. The future is here today. You snooze and you will lose.

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